Europe's Budget a Missed Opportunity

The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new 'EU taxes', a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission's proposals are a missed opportunity.

In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next 'Multiannual Financial Framework' (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission's proposal states, somewhat lamely, that it has "sought to strike the right balance between ambition and realism" and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the 'on budget' spending is counted, the Commission's proposals are in line with the five member states' demands, but if the 'off budget' money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is "stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories", in the words of one former British negotiator (quotes are from a recent CER seminar on "Reworking the EU budget").

However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission's proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.

The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).

In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get 'recycled' via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.

The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. "Even the Americans are reducing farm support", explains one British food producer, "if we do not reform the CAP now, then when?". The Commission should have proposed phasing out the 'single farm payment' (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.

With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.

Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total - but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.